We're in Danger of Being Blinded by Market Bottom Predictions 34 comments
an article to
-
Font Size:
-
Print
- TweetThis
Yesterday morning I read a brilliant article analyzing the market bottom: “Markets Have Hit a Bottom, But Is It THE Bottom?” by Eric Coffin, a contributor to Seeking Alpha, where I saw the article posted. Coffin does a great job taking a look at various economic fundamentals from the price of copper to the actions of the Fed.
He comes to the conclusion that although there are some positive signs out there, too much volatility remains to make any firm predictions about whether the market has hit a true bottom or not. I agree with him, but I also have a major problem with the value of his predictions. In fact, virtually every day I read articles on Seeking Alpha that are similarly brilliant and argue either for or against the market bottom and direction. Each makes a similar mistake.
The Quality Of Any Market Analysis Is Directly Related To The Scope Of The Analysis Beyond Economic And Market Factors.
I have thought for some time that the current global crisis in its most basic terms is not attributable to economic and market factors but to cultural factors. Every segment of our society, from construction worker to web designer to lawyer, investors, bankers, home buyers - all of this society - lived with certain standards and motivations that took us straight to where we ended up.
In most basic terms, it was a consumer society where the most important activity was to buy: buy newer, bigger, better, more expensive, higher tech, but buy even if it is with money you do not have. Yes, that had clear economic consequences, but it had other consequences in terms of lifestyle. That lifestyle may be replicated again at some point in the future, but it will probably take a generation or two.
If my premise is correct, that this crisis is basically due to cultural issues, then it would also be correct to assume that the crisis will result in cultural changes. Some of them are likely to have a dramatic impact on the economy and the stock market, both in terms of degree and quickness.
Among the most dramatic possibilities is the prospect of political upheaval. For example, I discussed the political issues that will swirl around the G20 in an article that was also published by Seeking Alpha, and also in a detailed look at protests of the middle/working class around the world.
Political volatility is not a part of Mr. Coffin’s analysis of the market bottom, but what would happen to the market if riots broke out within a few days of each other in various locations throughout the world? How will the world (consumers, investors, bankers …) react to those headlines? I am not predicting that those headlines will occur, but I find it hard to dismiss the prospect that they could occur. To ignore that when trying to determine a market bottom is to have a basic flaw in the analysis.
Similarly, an analysis that considers the possibility of improved earnings driving a market recovery needs to include some consideration of how the consumer might change culturally. For example, in his column in yesterday’s New York Times, (”Darkness Down The Road“), David Leonhardt raises this fundamental question: “There is no doubt that the economy is in terrible shape. The overall volume of loans is, in fact, falling. But is that because banks won’t lend? Or because businesses and families don’t want to borrow?”
To come to an answer, Leonhardt focuses on one industry: the rental car business. In addition to an analysis of the balance sheets of the major industry players that is revealing, he notes:
Overall industry purchases are down 63 percent relative to early last year, and all three companies have also laid off workers. Why? Because the economy is in terrible shape. Fewer people are traveling and renting cars. The companies already own too many cars, thanks to the sweetheart deals that Detroit offered in recent years to clear out its bloated inventory. ’From our standpoint, there is no liquidity crisis,’ says Patrick Farrell, an Enterprise vice president. ‘We’re buying fewer cars because we need fewer cars.’”
Interesting. To what degree will the lesser use of rental cars become a cultural legacy of the current crisis that will extend beyond the crisis itself? Have all the industries been identified that are going to be impacted even to some degree by cultural changes? In very real terms, this crisis is just starting to be absorbed by the public; so can we even start to predict how they will change? The certainty of a prediction about the bottom of the market is directly related to the uncertainty of cultural changes yet to come. I think there are a great deal.
Then there is the direction of the political philosophy of the U.S. We do not know yet just how far towards a more centralized government we will go. I do not think a market bottom can be predicted without taking into account what the role of the government will be two or three years from now.
I do believe there is great value in analysis of economic and market conditions and trends. But, I am increasingly convinced - and concerned - that non-economic and non-market factors will have a dramatically greater impact than most people currently factor into their predictions.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Joseph L. Sha...
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
On Mar 26 10:41 AM j_remington wrote:
> we have yet to clear the bear because there has been
>
> NO BROAD CAPITULATION i.e. panic selloff
>
> Retest near the low or at the low or below the low will happen within
> 6 months.
Bottoms occur when multitudes of factors are priced in over several down waves.
On Mar 26 11:12 AM hmorgan wrote:
> Hmm, this one is good, very good. My view is that bottoms are made
> at the peak of pessimism. Conversely tops are made at the height
> of optimism. It's difficult though not impossible to imagine pessimism
> being greater than that of October 10, 2008. (The internal bottom).
> The fear that day was of financial system collapse. A severe recession
> is certainly less pessimistic than a financial system collapse leading
> to depression. Of course, political unrest would again raise the
> level of pessimism to a measure that perhaps aproach that of October
> 10.
> Herb
Different, but not bad.
It is more the political will of our Leaders that is going to be the determining factor in resolving this global crisis. This is not a garden variety recession of past decades. It is a recession comparable to the Great Depresion which culminated in World War II as Germany was forced to embrase fascism as the ultimate solution to their 33% unemployment rate.
The Fed and the Treasury proved to be not up to tasks for the last 18 months. There is no reason to expect they will suddenly be able to solve mounting problems while they are still stuck with trying to solve "moldy" problems of subprime lending and the banking credit crunch.
Mounting problems are the rapidly increasing numbers of the unemployed; the debilitating cash crunch as companies other than the financials kept on burning through their cash reserves with no viable alternative to raising additional capital. Unlike the financial sector; most companies such as retail and manufacturing are simply too dependent on consumer spendings with GM the most high visibility candidate as the first giant non-financial fatality.
Sooner or later, companies other than financials are going to crash and burned and will be forced to declare bankcrupcies. This is going to be the next stimulus for a sustained market meltdown. With big companies which employ more than the financials per unit income going bankcrupt; more people are going to lose their jobs. Civil unrest will not be far behind as unemployment goes into double digits.
Our leaders are still looking at the rear-view mirrors. Shackled by the mortgage meltdown and the credit crunch while the problems of mounting unemployment and impending non-financial company bankcruptcies remained in the closet.
There is no Comprehensive Plan that addresses all facets of the current global economic crises the size of which has no precedent.
No sign of credible leadership from any nation except China perhaps that shows capability to arrest the downward trend. No sign of any government action credible enough for private investors to believe in. With private investors more than happy to wait out the crisis until it passes by; business activity is going to remain at a standstill.
No Leadership = No Comprehensive Plan = No New Investments = No New Hirings = No Economic recovery.
We are still in the firefighting mode. We are still busy discussing every nitty gritty news on the day by day basis. Our political leaders are still too busy trying to find every hidden trash we can puke into.
Cleaning the mess and rebuilding the economy are still too far away we don't even have any notion of how to start laying the groundwork for a Comprehensive Economic Recovery Program.
On Mar 26 02:53 PM aarc wrote:
> Fundamental and technical analyses are not the determining factors
> in this economic crisis of which the current generations the whole
> world has never experienced before.
>
> It is more the political will of our Leaders that is going to be
> the determining factor in resolving this global crisis. This is
> not a garden variety recession of past decades. It is a recession
> comparable to the Great Depresion which culminated in World War II
> as Germany was forced to embrase fascism as the ultimate solution
> to their 33% unemployment rate.
>
> The Fed and the Treasury proved to be not up to tasks for the last
> 18 months. There is no reason to expect they will suddenly be able
> to solve mounting problems while they are still stuck with trying
> to solve "moldy" problems of subprime lending and the banking credit
> crunch.
>
> Mounting problems are the rapidly increasing numbers of the unemployed;
> the debilitating cash crunch as companies other than the financials
> kept on burning through their cash reserves with no viable alternative
> to raising additional capital. Unlike the financial sector; most
> companies such as retail and manufacturing are simply too dependent
> on consumer spendings with GM the most high visibility candidate
> as the first giant non-financial fatality.
>
> Sooner or later, companies other than financials are going to crash
> and burned and will be forced to declare bankcrupcies. This is
> going to be the next stimulus for a sustained market meltdown. With
> big companies which employ more than the financials per unit income
> going bankcrupt; more people are going to lose their jobs. Civil
> unrest will not be far behind as unemployment goes into double digits.
>
>
> Our leaders are still looking at the rear-view mirrors. Shackled
> by the mortgage meltdown and the credit crunch while the problems
> of mounting unemployment and impending non-financial company bankcruptcies
> remained in the closet.
>
> There is no Comprehensive Plan that addresses all facets of the current
> global economic crises the size of which has no precedent.
>
> No sign of credible leadership from any nation except China perhaps
> that shows capability to arrest the downward trend. No sign of any
> government action credible enough for private investors to believe
> in. With private investors more than happy to wait out the crisis
> until it passes by; business activity is going to remain at a standstill.
>
>
> No Leadership = No Comprehensive Plan = No New Investments = No New
> Hirings = No Economic recovery.
>
> We are still in the firefighting mode. We are still busy discussing
> every nitty gritty news on the day by day basis. Our political leaders
> are still too busy trying to find every hidden trash we can puke
> into.
>
> Cleaning the mess and rebuilding the economy are still too far away
> we don't even have any notion of how to start laying the groundwork
> for a Comprehensive Economic Recovery Program.
On Mar 26 02:53 PM aarc wrote:
> Fundamental and technical analyses are not the determining factors
> in this economic crisis of which the current generations the whole
> world has never experienced before.
>
> It is more the political will of our Leaders that is going to be
> the determining factor in resolving this global crisis. This is
> not a garden variety recession of past decades. It is a recession
> comparable to the Great Depresion which culminated in World War II
> as Germany was forced to embrase fascism as the ultimate solution
> to their 33% unemployment rate.
>
> The Fed and the Treasury proved to be not up to tasks for the last
> 18 months. There is no reason to expect they will suddenly be able
> to solve mounting problems while they are still stuck with trying
> to solve "moldy" problems of subprime lending and the banking credit
> crunch.
>
> Mounting problems are the rapidly increasing numbers of the unemployed;
> the debilitating cash crunch as companies other than the financials
> kept on burning through their cash reserves with no viable alternative
> to raising additional capital. Unlike the financial sector; most
> companies such as retail and manufacturing are simply too dependent
> on consumer spendings with GM the most high visibility candidate
> as the first giant non-financial fatality.
>
> Sooner or later, companies other than financials are going to crash
> and burned and will be forced to declare bankcrupcies. This is
> going to be the next stimulus for a sustained market meltdown. With
> big companies which employ more than the financials per unit income
> going bankcrupt; more people are going to lose their jobs. Civil
> unrest will not be far behind as unemployment goes into double digits.
>
>
> Our leaders are still looking at the rear-view mirrors. Shackled
> by the mortgage meltdown and the credit crunch while the problems
> of mounting unemployment and impending non-financial company bankcruptcies
> remained in the closet.
>
> There is no Comprehensive Plan that addresses all facets of the current
> global economic crises the size of which has no precedent.
>
> No sign of credible leadership from any nation except China perhaps
> that shows capability to arrest the downward trend. No sign of any
> government action credible enough for private investors to believe
> in. With private investors more than happy to wait out the crisis
> until it passes by; business activity is going to remain at a standstill.
>
>
> No Leadership = No Comprehensive Plan = No New Investments = No New
> Hirings = No Economic recovery.
>
> We are still in the firefighting mode. We are still busy discussing
> every nitty gritty news on the day by day basis. Our political leaders
> are still too busy trying to find every hidden trash we can puke
> into.
>
> Cleaning the mess and rebuilding the economy are still too far away
> we don't even have any notion of how to start laying the groundwork
> for a Comprehensive Economic Recovery Program.
not recover from its highs of the last 5 years but that we can effectively learn to channel our spending in other areas more beneficial to our well being than the accumulation of consumer goods. However all this take time and since this is very early in the game we have no idea what will happen. To make any predictions at all is absurd. We are in brand new territory.
What I find very interesting in the last 5 months is the emergence of a challenge to reductionist thinking which is a product of our education where we seek to understand the whole by dissecting its parts.
Accordingly by becoming a culture of specialists we don't have many people with the expertise to look at the whole picture and as a culture we see mostly the trees and rarely the forest.
We are learning that everything is interconnected and we are
learning that lesson very quickly through the internet, the global economy, the environment, etc...
I don't know but I hope that we can use this crisis to make positive long term major societal changes.
My own absurd forecast is that we are still at the beginning of a process that will have many ups and downs and will take several years. The truth is who knows ?
United Airlines then ran an ad some may remember, where the boss called a meeting and handed out plane tickets to his people to go see customers face to face. That ad came toward the end of the recession and to some degree it resonated with business people, that personal contact beat faxes and phones, and travel started picking up, bringing hotel and car rental revenues with it.
All this to say: while I agree with your overall premise that we are witnessing a sea change in values in our society, there are sectors that will rebound to their former level, not because they represent extravagance, but because they are necessary business tools. Will the corporate jet business reach the heights it had a year or two ago? Will the Ritz be as popular as before? Maybe not. But I'd venture that businesses such as airlines, car rental agencies and hotels will most likely rebound.
As for the political angle: it will be interesting to see if this culture change creates a backlash against the "lend to spend" recipe the current leadership is pushing...
The serious strategists of capital are clearly concerned that the deteriorating conditions of global capitalism, and the USA, of course, will be the greatest challenge yet to its existence since the 1930's. More information below:
2009 03 08
Capitalism Future Of: Seeds Of Its Own Destruction
tinyurl.com/cmrlma
A few paragraphs follow:
Another ideological god has failed. The assumptions that ruled policy and politics over three decades suddenly look as outdated as revolutionary socialism.
“The nine most terrifying words in the English language are: ‘I’m from the government and I’m here to help.’” Thus quipped Ronald Reagan, hero of US conservatism. The remark seems ancient history now that governments are pouring trillions of dollars, euros and pounds into financial systems.
“Governments bad; deregulated markets good”: how can this faith escape unscathed after Alan Greenspan, pupil of Ayn Rand and predominant central banker of the era, described himself, in congressional testimony last October, as being “in a state of shocked disbelief” over the failure of the “self-interest of lending institutions to protect shareholders’ equity”?
In the west, the pro-market ideology of the past three decades was a reaction to the perceived failure of the mixed-economy, Keynesian model of the 1950s, 1960s and 1970s. The move to the market was associated with the election of Reagan as US president in 1980 and the ascent to the British prime ministership of Margaret Thatcher the year before. Little less important was the role of Paul Volcker, then chairman of the Federal Reserve, in crushing inflation.
Yet bigger events shaped this epoch: the shift of China from the plan to the market under Deng Xiaoping, the collapse of Soviet communism between 1989 and 1991 and the end of India’s inward-looking economic policies after 1991. The death of central planning, the end of the cold war and, above all, the entry of billions of new participants into the rapidly globalising world economy were the high points of this era.
Today, with a huge global financial crisis and a synchronised slump in economic activity, the world is changing again. The financial system is the brain of the market economy. If it needs so expensive a rescue, what is left of Reagan’s dismissal of governments? If the financial system has failed, what remains of confidence in markets?
What that means is that the idea that will save us and propel us prosperously into the future may not have been thought yet.
I see United States biotech companies with stateside manufacturing dominating the world biotech industry for years into the future.
Health is a huge area of incredible potential. I see health care improvements that will make a dramatic difference for all families and especially the elderly. New elder care concepts will continue to spring up and be successful. Instead of operating on 19th century equipment and protocol, hospitals will use patient centric systems that include automated patient history, care history, prescription history, and other relevant data.
When we do recover and triumphantly return to world leadership, it will hopefully be with a memory and a commitment not to repeat the past. More regulation will be required and a new compensation system on Wall Street will reward long term success.
I take your point about our consumer oriented system that drove us to gobble up scarce resources. Especially at Christmas time, we are whipped into a frenzy of gift buying. What we have learned to date from this crisis is that we don't need a great deal of what we are used to consuming and we can, in fact, do without.
It doesn't have to be all grim though. I had a great deal of fun recently, when I installed several solar lights at strategic locations around my house. They are set off by sensor and they work quite well, all powered by the sun. I can turn my front lights off and save electricity. Solar lighting is in its infancy. I can't wait to light up my entire yard and there really isn't a lot of great stuff on the market yet for this. Entrepreneurs get on this one.
Thanks for a thought provoking article.
People are still getting laid off and the auto industry is going to be the last giant to fall. We could see fall out of another 300,000 people. No one will be buying cars for 2 more years and Uncle Sam will probably spend $500 billion to save them.
We are not done with AIG yet. They will need another $300 billion to keep from going under. The next wave will be the life insurance companies, they have taken huge losses and if there is a run on policy cash value - watch out.
We haven't seen the effects of credit card default payments yet. This is the next big financial set back for the banks.
We haven't seen commercial real estate defauts yet. This may crush the banks.
What if the toxic asset program is not successful. What if the hedge funds offer $ 0.30 instead of $ 0.70 on the dollar. The banks won't get rid of the assets and we plunge futher into the black hole.
We are a consumer society and with the additional layoffs and basic fear, the consumer has pretty much dissapeared. This will have more impact in the coming months and expect more people in retail will lose their jobs.
Earnings reports are coming out and they can't be pretty.
A trillion here, a trillion there, a trillion trillion everywhere: Uncle Sam is printing more money than we have the paper to print it on. Here comes Jimmy Carter inflation. Get yourself some gold baby and short the treasury after Uncle Sam spends his $400 billion on the notes.
Obama's gonna institute every socialist policy he can. Clean power, healthcare for everyone, more money for education,cradle to grave government!!! Get out your check books folks, Uncle Sam wants you to pay up and pay more for everything. Just when we were doing so well!
Let's bail out some of the states. California and about 8 other states are in deep shit right now. Guess who is gonna help them out!!!! Get in line.
I agree with many other people, the hole is so big and so deep that there is no way to spend our way out of it. Thanks for the rush to spend money.
The credit bubble inspired spending that occurred last couple decades is over. Consumer spending will go down from 72% of GDP to a more normal 65% (about a Trillion $s off). Consumer debt will go down from 100% of GDP to 50% of GDP – about 7 Trillion $s. All this deleveraging will take several, somewhat painful, years.
Meanwhile we (and rest of the world) would be stuck with huge surplus capacity, it would lead to deflation. Lot of people mistakenly believe that we will have inflation due to Fed pumping (printing) money, that is unlikely IMHO, as surplus capacity would easily meet any (curtailed) demand.
Stock market hit bottom – not likely at all. We should revisit our lows, of course cannot predict the time – or the next highs or lows, but I am in the 500 camp for S&P.
> The new bull market is here. I'm 100% certain.
I repeat: "My skepticism of predictions in a complex system is proportional to the certitude of the predictor."
Because of the cultural changes you point out and the debt we've accumulated, I believe that in 2-4 years the US economy will look like Mexico's and Mexico's will look like central Africa.
Can't happen here? Every global economic transition was caused by the same two conditions: The losing country had accumulated more debt than their economy could support and the losing country had such incredible hubris they were unable to see it. The debt funded spending spree is over!
One world where the resources belong to everyone. Then instead of wasting billions on war, we can take that money and invest it in technology and free mankind from the burden of debt. The burden of drudery. We live in a world of false scarcity, the world has the resourcse to feed, house and educate everyone. thezeitgeistmovement.com
Shanghai and Szensen Indeces are now in the full blast rally mode of a 1-2-3-4-5 pattern. We Elliott Waves practioners call it the impulsive wave and the first high probability indication that the current downturn has already ended and the final bottom has already been set.
The next pullback after this impulsive rally will be the "opportunity of the century" among China investors to buy with a very high degree of confidence.
China markets have been going up and up since late Oct 2008 while that of the US, Germany, France, and England were digging further into the unknown abyss. Japan's Nikkei was able to prevent a lower low and is now in a holding pattern.
Taiwan, Hongkong, Korea, India, and even the Philippines are enthusiastically following the lead of China by not going down since Oct 2008! Australia made a small dip but was expected to follow where the US goes. They followed alright, but reluctantly.
It feels like the decoupling theory is now in a full blast-off mode from the launchpad.
Stock market is the barometer of a nation's economic health.
United States and Europe are still in the quagmire but are already at the last stages of this more than 8 years of corrective process that has started in year 2000. Projected target is still Q4 2009 to Q1 2010 as the time frame for the final bottom to be reached. Unless the US and Europe leaders wake up just in time before the next downward cycle begins again for the last time by Sept 2009 ending by Nov/Dec 2009 or may extend to Q1 2010. By that time, the US will be left far behind by more than a year already.
To my reconing ENVY is a more potent emotion than FEAR in order to motivate positive action rather than negative action or in-action.
Will the Americans and the Europeans simply stand-by or go further down this nightmarishly labyrinthian hellhole - while China and the rest of the world are starting to succesfully overcome their own economic problems well ahead of the United States? China is even starting to "usurp" the US role in the IMF. That's how confident they are of their economic recovery.
These days, a nation's strength is no longer being measured by it's military dominance nor it's technological prowess to reach the moon first.
It is how it's economy is performing in the Global Marketplace which is the ARENA of the present and into the future.